Peers Battle in Rancho Santa Fe

San Diego's old financial scandals never seem to die. Decades after the principals have gone to the hoosegow and been released, the muck keeps rising to the surface. An example is Whispering Palms, a residential area that includes a golf course in upscale Rancho Santa Fe. (This lies outside super-upscale Rancho Santa Fe's historic "covenant" area, home of the plutocracy, but Whispering Palms is hardly middle class.)

Today, people aren't whispering in Whispering Palms. They're shouting. A substantial majority of residents in a neighborhood of 154 homes, called Greens II and Greens III, has been in court for four years, charging that an architectural committee dominated since 1978 by Richard Cavanaugh has exercised complete and arbitrary control over homeowners' expansion, remodeling, and landscaping plans, even though he owns only a handful of the properties.

Back in the 1960s, Cavanaugh's company developed Whispering Palms in a joint venture with partner Swan Constructors, which was supplying the money. Swan, in turn, was part of U.S. Financial. For those who remember San Diego's seedy past, it was that U.S. Financial, a nationally infamous accounting swindle. Among many shady maneuvers, the company would sell products to itself and chalk up the proceeds as sales.

U.S. Financial plunged into bankruptcy in 1973. According to the report of the trustee, the chief executive, R.H. Walter, pleaded nolo contendere to charges of conspiracy and filing false government reports and went to prison for three years. Chief bean counter John B. Halverson entered the same plea to four fraud, conspiracy, and false filing charges and got seven years in the pokey. The trustee noted that the fraud lasted for years because it was so complex, and Walter and Halverson, who dominated decision-making, were the only ones who knew how all the pieces fit together.

The original Whispering Palms architectural committee consisted of five people: Cavanaugh was one, and two others were Walter and Halverson, who were replaced after the sewage oozed to the surface.

In 2002, the Property Owners of Whispering Palms, residents of Greens II and III, charged in superior court that Cavanaugh, his company Newport Pacific, and the architectural committee had breached their fiduciary duty and covenant of good faith by, among many things, arbitrarily imposing restrictions on the residents and charging them fees up to $1500 in the process, while permitting no appeals. Further, the members of the committee could appoint their successors; hence, Cavanaugh and his wife Chris had kept control for so many years. This tight control has scared off potential buyers in the area, thus depressing real estate values, says Jeffrey Carmel, president of the homeowners' group.

The judge ruled that because the residents of Greens I were not a party to the suit, the folks from Greens II and III lacked standing. The case was thrown out. The losers appealed, and the appellate court overruled the superior court in September of last year. The case will go to trial again.

The Cavanaughs have been able to keep control for so long because of one document. As part of the procedures in U.S. Financial's liquidation, Cavanaugh won the right as "declarant" to control any changes to Whispering Palms codes, covenants, and restrictions. Dennis Schmucker, who was president of Swan in the bankruptcy proceedings, and Donald Helmer, the Swan attorney in liquidation, assigned those rights in October 1978.

In preparing for the retrial, homeowners' president Carmel searched thousands of documents. He discovered that in June 1978, what was left of Swan was sold to Regis Homes. In August 1978, the name was changed to Regis. Therefore, argues Carmel, Schmucker and Helmer were not officers of Swan when they signed the October 1978 document. Greens II residents will use this argument. Greens III residents, to whom it does not apply, will rely on the main outline of the earlier case.

Schmucker went on to a distinguished career as a bankruptcy trustee in some of San Diego's most high-profile cases. Helmer, unfortunately, did not do so well. He sank deeper and deeper into alcoholism and, according to municipal court and California bar records, was convicted of stealing from his law clients. He was sentenced to prison and resigned from the bar.

While Schmucker is sympathetic to the cause of the Whispering Palms residents, he fears they are approaching the case the wrong way. He remembers that the executing of the October 1978 document was "a correction of a prior error and a matter of oversight." After the Swan sale was consummated, "Cavanaugh came back and said we overlooked this; the attorney [Helmer] agreed, I agreed, we called Regis," and control of the project was turned over to Cavanaugh. "Even though it occurred after the sale, it was legitimate."

Overall, "I am amazed that the homeowners continue to be confronted with this type of control more than 25 years later," says Schmucker. He is sorry that for the court suit, "they continue to hold on to a technicality that I think they will lose on."

Replies Carmel, "There was never a document showing that this was a correction for something overlooked at an earlier time or that Regis had any part in the correction. Further, throughout the four years, Cavanaugh through his Newport Pacific has banked everything on this document."

Tracy Richmond, attorney for the architectural committee, claims Cavanaugh does not control the other committee members, including his wife. Similar charges have been made since 1971, "and nobody has prevailed in court, time and again," says Richmond.

The fees don't even cover the committee's costs. "They are doing their best in a thankless job. They are not making money on the fees," insists Richmond. The committee has tried to resolve litigation and create an elected body that Cavanaugh wouldn't serve on, but the homeowners want control, says Richmond.

Carmel counters that the current homeowners' board has offered to step down, "but democratic control should remain with the people who live here; control should not be dictated by an individual and his wife."

Potential homeowners know the situation before they buy, argues Richmond. The rules that govern the property "are in your deed and your contract; this is how the architectural committee will be run; the committee members will appoint their successors -- that is in the contract. We are all big boys and adults. If we can't read and understand that, it is not Mr. Cavanaugh's fault."